Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 1: podcast pack of West it looks like it's trading, that
Speaker 1: it stopped. Western Alliance is now trading, it's down twenty
Speaker 1: two percent. We want to bring in another smart voice here,
Speaker 1: Jay Hatfield, CEO of Infrastructure Capital Management, and Jay, your
Speaker 1: veteranan of these markets. What do what do you make
Speaker 1: of this regional bank business these days? How these structure trading?
Speaker 3: Well, you know, I was around during the financial crisis
Speaker 3: and this is sort of the normal, the normal dynamic
Speaker 3: that you run into. Whereas if you have problem with
Speaker 3: one bank, then short sellers will naturally talk to the
Speaker 3: other banks. And one thing that's important to remember is
Speaker 3: that the bondholders get white out as well, and it's
Speaker 3: easy to manipulate or quickly blow out the CBS market
Speaker 3: and so then that can be a signal to equity traders,
Speaker 3: but it's a very i liquid market, so that can
Speaker 3: then breed you know, lost in deposits, and with the
Speaker 3: Fed being so hawkish, it's horrible to his deposits as
Speaker 3: we saw from First Republic.
Speaker 4: What do you think needs to happen to put an
Speaker 4: end to this?
Speaker 2: I mean, how many people came out yesterday and said JP.
Speaker 4: Morgan, Wait, what day is today?
Speaker 2: No, how many people came out on Monday and said
Speaker 2: JP Morgan, you know, has put an end to this
Speaker 2: by buying First Republic. This seals it off. There's no
Speaker 2: more problems for regional banks. I mean, out of the
Speaker 2: Milkan conference, every single big wig was saying the banking
Speaker 2: system is sound. This was, you know, an idiosyncratic issue
Speaker 2: and just bad management at First Republic and SBB.
Speaker 4: But it's not going to be a problem that spreads.
Speaker 4: There's no contagion.
Speaker 3: Well, I think that they're just trying to generate some
Speaker 3: stability in the market and really just trying to stick
Speaker 3: to the party line, which the government wants them to.
Speaker 3: But until you really fix the posit insurance and or
Speaker 3: the FED cuts rates, which is extremely unlikely they should
Speaker 3: have done it last meeting, then.
Speaker 4: You're gonna but they're not gonna do it at this meeting.
Speaker 3: Or definitely meeting now they might raise again. The best
Speaker 3: way to predict what the Fed is gonna do is
Speaker 3: think about what they should have done a year ago.
Speaker 3: So if it's June of twenty two, then inflation ad
Speaker 3: and peaked, and they probably We're more bullish about the
Speaker 3: second half of the year because then it'll be obvious
Speaker 3: inflation's peaked and then the Federal figured out, But we
Speaker 3: wouldn't expect them to cut rates because that'll take them
Speaker 3: a year to figure out that they probably should cut rates.
Speaker 1: So, but I mean, the concern here on some of
Speaker 1: these regional banks has been called out by analysts and economists.
Speaker 1: Is it really sets in motion a credit crunch or not.
Speaker 1: Maybe that's your credit crunch, but just you know, it's
Speaker 1: just tougher to get credit out there, and what credit
Speaker 1: you do get the fund business and growth is more expensive,
Speaker 1: and that in and of itself could really either trigger
Speaker 1: a recession or make it a deeper than maybe people think.
Speaker 1: Is that a material risk in your mind?
Speaker 3: It definitely is, and it's kind of surprising the Feds
Speaker 3: seems to be ignoring it. But we still are constructive
Speaker 3: about the economy, maybe not staying out of a technical recession,
Speaker 3: but not going into a deepercession. And the real dynamic
Speaker 3: there is that we have a shortage of housing and autos.
Speaker 3: So unlike the FEDS model where they assume we have
Speaker 3: to have unemployment, you don't. You just have to have
Speaker 3: a shrinking money supply dropping commodity prices that will cure inflation.
Speaker 3: That's what the history shows. There is eleven hundred and
Speaker 3: fifty percent increase in oil prices during the seventies, so
Speaker 3: all the things that Fed learned from the seventies are incorrect.
Speaker 3: Is really driven mostly by very high energy prices.
Speaker 2: So you think that simply a goods and housing shortage
Speaker 2: will be enough to keep us out of a deeper
Speaker 2: session deep one.
Speaker 3: Yes, But I wouldn't ignore the credit crunch and particularly
Speaker 3: has been you know, publicized on not so much the
Speaker 3: mortgages that affect reads because those are gigantic buildings with
Speaker 3: you know, very liquid like the building we're in right now,
Speaker 3: But these smaller real estate lending, smaller buildings throughout the
Speaker 3: country could be pressured.
Speaker 5: Yeah.
Speaker 2: Well, I mean the big question is and the you know,
Speaker 2: the biggest names in finance have been warning. I think
Speaker 2: Charlie Munger was telling this to an Australian newspaper, and
Speaker 2: then someone much younger from Apollow, Mark Rohan, was telling
Speaker 2: this is Shinali Bassic that you know the next shoot
Speaker 2: to drop is commercial real estate.
Speaker 4: We should be watching out for.
Speaker 3: That, and there's no doubt about that. It just would
Speaker 3: point out it's not as bad as the financial crisis
Speaker 3: because you do have strong recoveries, so there's less leverage,
Speaker 3: it's easy to repossess, which is not true for individual housing,
Speaker 3: and there is a deep bid at some level for
Speaker 3: most of these assets, so you really just have to
Speaker 3: analyze the portfolios. But I don't think that's going to
Speaker 3: be catastrophic, just for the reason I mentioned that the
Speaker 3: loan to values were all pretty reasonable and then so
Speaker 3: therefore the recoveries are going to be pretty substantial.
Speaker 1: Jay, I'm going at WTI crud here. It's off three
Speaker 1: point seven percent today, just under seventy three dollars a barrel,
Speaker 1: giving up more than the gains it had when the
Speaker 1: OPEC plus cut production several weeks ago. What's going on in.
Speaker 2: Even though supply is tight, right? I mean every time
Speaker 2: I see, we see stockpiles coming out. They're lower than
Speaker 2: it had been anticipated.
Speaker 3: Yeah, So one thing that keep in mind about oil
Speaker 3: is it's not just a commodity, it's also a like
Speaker 3: a stock, so it has a bit of about point
Speaker 3: eight to the market. So you know, given the fears,
Speaker 3: if there are headlines like we're seeing with the banking sector,
Speaker 3: you can almost be certain, unless Ope's acting that day,
Speaker 3: that oil be very weak. In fact, this is something
Speaker 3: that FED should not ignore. Oil prices now with this drop,
Speaker 3: are off about ten percent just since the banking crisis occurred,
Speaker 3: and that's highly deflationary because it does bleed through to core,
Speaker 3: so that'll take about a half percent out of core.
Speaker 3: But of course they don't look at these real time indicators. Again,
Speaker 3: commodity prices mightey supply and the housing market. They're focused
Speaker 3: on the lagging indicators, which is really the labor market.
Speaker 4: So let me ask you a question.
Speaker 2: Just got a minute left here, But if we have
Speaker 2: a recession that's not a horrible recession, short and shallow,
Speaker 2: what kind of recovery do we have and how do
Speaker 2: you figure in the FED? Because they don't want to
Speaker 2: cut rates and they're not going to cut rates. It
Speaker 2: seems unless inflation gets back to two, terribly unlikely or
Speaker 2: something horrible happens, which I guess you don't expect.
Speaker 3: Well, you could argue that this banking crisis is a
Speaker 3: horrible thing happening, so maybe that'll actually force them to act,
Speaker 3: because keep in mind, it's just terrible for the banking
Speaker 3: business to have inverted O curve because if you lose deposits,
Speaker 3: then you lose profitability. And there's something called roll down
Speaker 3: where when you have a three year bond, it becomes
Speaker 3: a two year bond, becomes a one year bond, and
Speaker 3: that becomes more valuable. But when you have an inverted
Speaker 3: yield curve, that doesn't occur. So it's really terrible for
Speaker 3: the financial system. So I guess that's the upside. The
Speaker 3: worst it gets, maybe the federal at least stop raising
Speaker 3: rates and maybe even cut them later this year.
Speaker 1: All right, Jay, I always appreciate getting some of your time,
Speaker 1: very learned approach to this, and we appreciate getting some
Speaker 1: of your comments. Ja Haffield he's the CEO, founder and
Speaker 1: portfolio manager of Infrastructure Capital Management.
Speaker 4: What's the website, by the way, with your inflation tracker?
Speaker 3: Infracap funds dot Com.
Speaker 2: Ww FRA CAT infrastructure infracap funds dot Com.
Speaker 5: Yeah, got it.
Speaker 1: So that's an inflation tracker you like, right, Mat.
Speaker 2: Yeah, I mean we've talked about this with JB four
Speaker 2: any Essentially what you pull out the rent component?
Speaker 3: Yes, we just put in case shell air. It's very simple.
Speaker 3: You could do it yourself. We put in case shell
Speaker 3: air instead of the BLS's arcane estimate of rents.
Speaker 1: Right, Jay, thanks so much for joining us. We really
Speaker 1: appreciate it.
Speaker 5: You're listening to the team.
Speaker 6: Ken's our live program, Bloomberg Markets weekdays at ten am
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Speaker 1: Well, a busy week just got even busier. Of course,
Speaker 1: we have earnings coming out in mass this week, We've
Speaker 1: got lots of eco data coming out, and of course
Speaker 1: the Fed tomorrow and add to that today a renewed
Speaker 1: run on some of these regional banks really just kind
Speaker 1: of really throwing a wrench into this market here. Prea
Speaker 1: Misterjoints is Managing director and Global head of Rate Strategy
Speaker 1: of TD Securities pre I mean, I guess the bank
Speaker 1: issue is not done, even though Jamie Diamond and JP
Speaker 1: Morgan stepped in for First Republic yesterday. How do you
Speaker 1: think this banking turmoil impacts the FED and how it
Speaker 1: thinks of the economy and what it needs to do
Speaker 1: with its policy.
Speaker 7: Sure, thanks for having me on so great question.
Speaker 8: I mean, the Fed has a dual mandate, so they're
Speaker 8: looking at the labor market and inflation, and if you
Speaker 8: look at the data right now, it would argue for
Speaker 8: them to hike, and we're looking for them to hike
Speaker 8: tomorrow as well as hike once more in June. But
Speaker 8: I think the banking in fact, I'm calling it a crisis.
Speaker 8: I mean this is this wasn't just a couple of
Speaker 8: banks mismanagement of portfolios. I think there's something structural here.
Speaker 8: You know, we're seeing deposit outflows across the banking system.
Speaker 8: I think that continues because money market funds are giving
Speaker 8: you higher rates than banks.
Speaker 7: There are unrealized losses on portfolios.
Speaker 8: And we're not even talking about the loan book between
Speaker 8: the commercial real estate or other loans. So I think
Speaker 8: there's a banking issue among a lot of banks, not
Speaker 8: just the banks that have failed. And what that's going
Speaker 8: to do is for some banks, I think the FDIC
Speaker 8: receivership option. For others, it's going to be some sort
Speaker 8: of consolidation. But overall, you're asking about the longer term impact.
Speaker 8: I think it's one of bank deleveraging. Banks have to
Speaker 8: either raise capital or shrink their balance sheet. It's very
Speaker 8: hard to raise capital, if not impossible, for SVB, it
Speaker 8: was impossible. So I think in that scenario, a bank
Speaker 8: is going to have to cut back where they can.
Speaker 8: So I see title lending standards shrinking off the loan book.
Speaker 8: It's very hard for them to sell securities because they're
Speaker 8: in the health to maturity portfolio, but the loan book shrinks,
Speaker 8: and so that's going to have an impact on the
Speaker 8: economy long over the next six months or longer. And
Speaker 8: so our view is that the economy was already heading
Speaker 8: into a slowdown before March or before the start of
Speaker 8: the banking crisis. I think the supercharges it, which is
Speaker 8: why we're thinking the FED is cutting starting later this
Speaker 8: year December, and then cuts a lot more than what's
Speaker 8: priced in, so it's you know, I think this is
Speaker 8: just the accelerant.
Speaker 2: Why do you think the FED would cut I mean, here,
Speaker 2: they are raising rates for more than a year in
Speaker 2: order to bring this about. Why would you turn around
Speaker 2: and cut after you've achieve your goal? Or I mean
Speaker 2: they haven't even gotten close to the inflation level they want.
Speaker 2: Jay Jay continues to tell us. J Powell continues to
Speaker 2: tell us he needs to get closer to two percent.
Speaker 2: We saw a headline number of you know, seven percent.
Speaker 8: So yeah, now, I think that's fair. They did want
Speaker 8: to slow things down, but they have to be careful
Speaker 8: what they wish for. Right if they get a really
Speaker 8: sharp slowdown or a disorderly slow down, I would say
Speaker 8: the tightening and financial conditions in the last two months
Speaker 8: is disorderly. It's fast, it's creating this risk of sentiment.
Speaker 8: It starts to impact other sectors of the economy. Now,
Speaker 8: right now, I think the data is still strong, but
Speaker 8: remember the FED is data dependent, and so if the
Speaker 8: unemployment rate starts to tick up, if you get negative payrolls.
Speaker 8: We have negative payrolls starting in the fourth quarter in
Speaker 8: our forecast economy hitting a recession, they're going to have
Speaker 8: to start cutting.
Speaker 9: Now.
Speaker 8: I'm not saying they're going to cut to zero because
Speaker 8: inflation is going to prevent that. But you know, should
Speaker 8: the economy have five and a half percent FED funds
Speaker 8: when the unemployment rates rising sharply and you're seeing negative pyros,
Speaker 8: that's what we think. They start the cutting and then
Speaker 8: you see the.
Speaker 2: Unemployment rate rising sharply. Currently we're at three and a
Speaker 2: half percent. It's a level that I didn't even know
Speaker 2: we could get to. You know, I thought that was impossible.
Speaker 7: No, Lily more it is tight.
Speaker 4: But we have nine and a half billion open jobs.
Speaker 8: But you know, there's a structural mismatch between the in
Speaker 8: the skills mismatch issue. So we see the uneployment rate
Speaker 8: at five and a half by the end of next year,
Speaker 8: and that's much higher than the FED once and that's
Speaker 8: why I think they're going to have to cut more.
Speaker 2: But that's a long time from now. That's like a
Speaker 2: century away the end of next year.
Speaker 1: Making it's there.
Speaker 2: That's dude, that's that's very difficult to forecast what's going
Speaker 2: to happen in more than eighteen months.
Speaker 1: That's what That's what that's what we pay Pria the
Speaker 1: big bucks for. So she goes out there.
Speaker 2: I mean, but so Pria, you see the FED cutting
Speaker 2: in December this year. We do?
Speaker 7: We do? I mean is there a risk to that?
Speaker 8: Yes, I would say risks are later because they've just
Speaker 8: may not have enough evidence to say that the slowdown
Speaker 8: is more than they anticipated. And remember the unemployment rate.
Speaker 8: You're talking about how difficult it is to focus. It's
Speaker 8: also the most lagging indicator. I mean, the first thing
Speaker 8: that happens is job openings come off, then the layoff start,
Speaker 8: and then for the unemployment rate to really rise. We
Speaker 8: might be already in a recession, so it might be
Speaker 8: janned when they start to cut. But yeah, we're actually
Speaker 8: forecasting December this year first rate cut, and then fifty
Speaker 8: basis point cuts most of next year.
Speaker 1: So what are you going to be listening for tomorrow?
Speaker 1: Pria in the comments and the Q and A from
Speaker 1: FED Chairman j Pale. That might either give you greater
Speaker 1: conviction to that call or maybe cause you some concern.
Speaker 8: So I'll be watching for how he talks about bank
Speaker 8: lending standards. I mean they've had I think they would
Speaker 8: have seen the slews the Senior Loan Officers Survey, which
Speaker 8: hasn't yet come out after March, but we're going to
Speaker 8: get that report next week. How does Cheppael talk about
Speaker 8: it is that, yes, they are tightening, this is what
Speaker 8: we expected to your earlier point that this was the
Speaker 8: intent of tightening, or well, if it's disorderly, if it's
Speaker 8: too much tightening, we have to reconsider. So how do
Speaker 8: they talk about the bank credit channel. I'm sure he's
Speaker 8: not going to talk about specific banks, but that's one.
Speaker 8: The other one, you know, is on inflation. How patient
Speaker 8: can they be on inflation? If inflation is still in
Speaker 8: public enemy number one, then I think this is really
Speaker 8: negative for his assets because that means even if the
Speaker 8: unemployment rate is rising, if inflation is high and sticky,
Speaker 8: the FED can't respond. So I'll be watching for that.
Speaker 8: I hope somebody asks him about QT quantitative tightening, which
Speaker 8: I think is partly responsible for what's happening because it's
Speaker 8: draining reserves and deposits from the banking system. But I
Speaker 8: think the Fed's always talked about that is happening in
Speaker 8: the background, So we may not get much, but I
Speaker 8: still hope he's asked.
Speaker 4: So, I mean the banks.
Speaker 2: You don't expect anything specific on names, right, but will
Speaker 2: he talk about financial stability?
Speaker 4: Does he have to.
Speaker 7: It? Doesn't have to. That's not his mandate.
Speaker 8: And I think he's going to say, well, you saw
Speaker 8: Vice share Bars report on it. The FDIC is talking
Speaker 8: about different things they can do. This is really a
Speaker 8: Congress if it's a regulation issue that something Congress needs
Speaker 8: to work on. I think he's going to deflect and
Speaker 8: say the FED meeting is about monetary policy. But I
Speaker 8: do think he's going to reinforce data dependence, right, so
Speaker 8: if the data suddenly turns, I think the FED is
Speaker 8: going to say, well, we'll respond and state that even
Speaker 8: if they do pause, they could hike after that, or
Speaker 8: they could cut after that. I don't think they'll have
Speaker 8: the ability to hike, but I think he might say
Speaker 8: that and sound a little hawkish tomorrow.
Speaker 5: All right.
Speaker 1: Prea, thank you so much for joining us. Always appreciate
Speaker 1: getting your perspective there. Prea Misrap. She's a managing director,
Speaker 1: Global head of rate Strategy at TD Securities. I think
Speaker 1: with a very interesting call here, expecting the FED to
Speaker 1: begin cutting rates at the end of next of this
Speaker 1: year and then continue at maybe an accelerated pace in
Speaker 1: twenty twenty four.
Speaker 4: So and unemployment rising.
Speaker 2: I mean, if you look at the unemployment rate right now,
Speaker 2: it's doing anything but right. On the other hand, Friday,
Speaker 2: we're going to get a new number.
Speaker 6: You're listening to the tape Cat's are live program Bloomberg
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Speaker 1: We've got like we don't have enough going on. We've
Speaker 1: got earnings all over the place. We've got Ego data
Speaker 1: all over the place. We've got the Fed. Now, we've
Speaker 1: got renewed banks selling. But we also have this issue
Speaker 1: of paying our bills, our government paying the bills. I mean,
Speaker 1: you know, I balance a check book every month like
Speaker 1: a lot of folks. I'm sure, but the government, I'm
Speaker 1: not sure. They're not so good at that. Dwayne Wright,
Speaker 1: senior government analysts with Bloomberg Intelligence, joins us here. So Dwayne,
Speaker 1: give us a sense of where we are with the
Speaker 1: debt sealing negotiations and maybe what's kind of the best
Speaker 1: guess of how this thing plays out.
Speaker 9: Well, where we are Republicans pass their gets You bill
Speaker 9: last week, and we then got news from Secretary Treasury
Speaker 9: Yellen that the new X state is June first, and
Speaker 9: so shortly after that we heard the Biden White House
Speaker 9: invite the leaders of the House and Senate, so the
Speaker 9: majority and minority leaders in the House and Senate to
Speaker 9: the White House to essentially kick off negotiations on a
Speaker 9: path forward. So a very timely move. I think the
Speaker 9: challenge here is that one, there's not a whole lot
Speaker 9: of time. It's May second, June first is right around
Speaker 9: the corner to the House pass bill is pretty much
Speaker 9: a non starter for Democrats, who have signaled that they
Speaker 9: only want a clean debt ceiling raise. So really the
Speaker 9: question is where do we go from here if the
Speaker 9: two parties are pretty much far apart from what they're
Speaker 9: looking for. Yeah, to me, deat ceiling.
Speaker 4: Does the do the Democrats get what they want?
Speaker 2: I mean, will they hold you know, the economy hostage
Speaker 2: and unless they get a clean debt ceiling raise or
Speaker 2: isn't it, you know, in a sense, the responsible thing
Speaker 2: to try and control spending while you're raising the debt limit.
Speaker 9: I think we're heading towards a path where both parties
Speaker 9: can say that they've won here. First off, I think
Speaker 9: we're gonna need a short term debt ceiling raise, a
Speaker 9: kick the can down the road because parties are just
Speaker 9: too far apart on how much to cut.
Speaker 4: Don't we always do that? Dwayne isn't kicking the can
Speaker 4: what the government?
Speaker 2: Wouldn't it be great if they sat down and thought
Speaker 2: of a long term solution that included lifting the debt
Speaker 2: limit but also put some kind of cap on our spending.
Speaker 9: I think that's where we'll go. I just don't think
Speaker 9: they can get there in four weeks, So kicking the
Speaker 9: can down the road to say the fall is probably
Speaker 9: what's going to happen, and that's going to allow time.
Speaker 9: I'm for both parties to say, what's the universe of
Speaker 9: cuts that we're willing to live with, What can we
Speaker 9: get out of the House, what can we get out
Speaker 9: of the Senate. And it sets up a narrative where
Speaker 9: if they can agree on what that spending package looks like,
Speaker 9: not just for next year, but also for say, the
Speaker 9: next five to ten years, they can work on what
Speaker 9: those specific cuts are and in the meantime pass a
Speaker 9: clean debt ceiling race. So you have on the one hand,
Speaker 9: President Biden getting his clean debt ceiling rais and then
Speaker 9: on the other you have the Republicans getting their fiscal
Speaker 9: budgetary cuts which they've put forward. So this whole process
Speaker 9: needs to play out for a bit longer, especially when
Speaker 9: keep in mind Republicans just pass their bill, So we
Speaker 9: need a couple more weeks, probably a couple more months
Speaker 9: to figure it all out.
Speaker 2: If you step back on this, Dwayne and I'm you know,
Speaker 2: you live in this and Paul and I are just
Speaker 2: you know, tourists. Has anyone suggested a smart solution that
Speaker 2: will solve this once and forever, you know, other than
Speaker 2: just saying no more debt ceiling, you know, something that
Speaker 2: somehow controls spending but also doesn't push us to the
Speaker 2: brink every few years.
Speaker 9: There have been a lot of ideas put out there
Speaker 9: in terms of how we get there, whether it's creating
Speaker 9: a commission, whether it's just spending to the rate of inflation.
Speaker 9: I think the challenges that both parties will have to
Speaker 9: do things that they don't want to do, because addressing
Speaker 9: our fiscal situation involves some level of addressing the tax
Speaker 9: side of the equation and also some level of addressing
Speaker 9: the spending side of the equation. Keeping in mind part
Speaker 9: of that spending is Medicare social security, and those two
Speaker 9: issues are off the table as far as these budget
Speaker 9: discussions are. So, I think that there are a lot
Speaker 9: of out there, but it just involves a lot of
Speaker 9: political choices that members past and present have not been
Speaker 9: willing to make. Republicans don't want to raise taxes. Democrats
Speaker 9: don't want to touch Medicare.
Speaker 1: All right, Barry rid helts wealth Management, he darkens the
Speaker 1: door here, I know he wants to jump in.
Speaker 10: So, Matt, the solution is we moved to a parliamentarian
Speaker 10: system so that you whoever's in charge, gets to pass
Speaker 10: their budget, as opposed to going through this circumstance where
Speaker 10: we've already allocated this money by Congress. We just failed
Speaker 10: to say, oh, we have to raise that debt ceiling,
Speaker 10: you know, Congress.
Speaker 2: Or you could get I mean, you could get rid
Speaker 2: of the filibuster, right, and then the party in charge,
Speaker 2: the party with the majority, automatically gets to do whatever
Speaker 2: it wants.
Speaker 10: One would think. But so instead we have these crazy
Speaker 10: DC permutations as opposed to focusing on doing the people's business.
Speaker 10: That has taken a back seat to posture during and
Speaker 10: teeing up for the next election.
Speaker 1: All right, all right, Barr, you're gonna stick around because
Speaker 1: we've got you h here in our studio here, Dwayne right,
Speaker 1: thanks so much for joining us, Dwayne Wright as a
Speaker 1: senior government analyst Bloomberg Intelligence. Really sharp. Guy's got a
Speaker 1: lot of great experience. Unfortunately he got his undergraduate Chapel
Speaker 1: Hill at the University of North Carolina at Chapel Hill.
Speaker 4: But what a nice place that must be.
Speaker 1: Yeah, yeah, so I hear.
Speaker 4: It's where's duke again?
Speaker 1: What's in Durham? In Durham ten miles down the road,
Speaker 1: fifteen to five to one.
Speaker 2: If you had, just if you had one night to
Speaker 2: go to either town, would you when you go to
Speaker 2: Chapel Hill.
Speaker 1: Used to be you'd go to Chapel Hill hands down.
Speaker 1: Now it's the exact opposite. Durham has undergone this tremendous renaissance.
Speaker 1: It is now the place to be.
Speaker 6: You're listening to the team Ken's Are Live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern.
Speaker 5: On Bloomberg dot Com, the iHeartRadio.
Speaker 6: App, and the Bloomberg Business app, or listen on demand
Speaker 6: wherever you get your podcast.
Speaker 1: Well, the bad news is Matt Miller just abandoned us.
Speaker 1: He's out there because he's a you know, he's a
Speaker 1: TV star, so he's talking to his producer. The good
Speaker 1: news is we more than make up for with Barry
Speaker 1: Rudholt's He Joints is here in our studio. He's rod
Speaker 1: Halt's Wealth Management. He's got a podcast, Masters in Business.
Speaker 1: We appreciate him coming in. All right, here's we've been
Speaker 1: talking about the banks, but there's some stuff going on
Speaker 1: out in Hollywood. The writers are striking and that can't
Speaker 1: be good for the media business. I don't know. But
Speaker 1: Keether Ronganathan Joints is, she's a senior media analyst for
Speaker 1: Bloomberg Intelligence. KEITHA, let's start off which just tell us
Speaker 1: why the writers are striking, and then we'll get to
Speaker 1: what it means for the media companies.
Speaker 11: Yeah. Absolutely, Thank you so much Paul for having me.
Speaker 11: So the writers are striking, of course because of a
Speaker 11: whole new ecosystem where they're making much less money than
Speaker 11: they used to. And this is really the first time
Speaker 11: that they are striking in fifteen years. So the last
Speaker 11: time we had a major strike of this magnitude was
Speaker 11: back in two thousand and seven, two thousand and eight,
Speaker 11: but that was a very different time in the media ecosystem.
Speaker 11: You know, you had a very thriving model with the
Speaker 11: TV networks, but with streaming, everything has changed. It has
Speaker 11: revolutionized the industry, and it has also changed the way
Speaker 11: that writers are paid, and that's what they're really unhappy about.
Speaker 10: Hey, Githa Barry riddolts here. So one of the things
Speaker 10: I noticed the Writer's Guild talking about is artificial intelligence
Speaker 10: as source material using AI generated text. What's going to
Speaker 10: happen with this? Is Hollywood gonna shift to an all
Speaker 10: AI based type of scripts or are the writers going
Speaker 10: to get their way?
Speaker 11: Yeah, it's it's a really really important question, and it's
Speaker 11: a great point that you bring up. What is happening
Speaker 11: this time around is I think the writers have less leverage,
Speaker 11: and you know, it's just a very different time in
Speaker 11: the full media ecosystem. So first of all, you know, streaming,
Speaker 11: of course is front and center right now, they're not
Speaker 11: as dependent. So of course, when when writers go on strike,
Speaker 11: it's the t television shows that you know where the
Speaker 11: production is halted. And so I think those are the networks.
Speaker 11: The networks that are affected the most. Most of the
Speaker 11: streaming services have enough library of content, they have a
Speaker 11: stockpiled on on some show, so they're not that badly affected.
Speaker 11: So I think, you know, if you're kind of looking
Speaker 11: at broadcast television obviously, so generally I would say that
Speaker 11: the disruption is not going to be as dramatic. And
Speaker 11: then the question of AI is really an important one
Speaker 11: because yes, I think Hollywood is definitely going to look
Speaker 11: to AI, and of course the writers want to make
Speaker 11: sure that their source of livelihood isn't impacted, and they
Speaker 11: want to make sure so they're not totally against using AI,
Speaker 11: but they want to make sure that, you know, residual
Speaker 11: payments are not going to AI or credits are not
Speaker 11: being taken away by AI. So it's going to be
Speaker 11: interesting to see how, you know, the definition of technology
Speaker 11: kind of gets incorporated into these new negotiations.
Speaker 2: I don't know that AI would necessarily do worst job
Speaker 2: than the kind of writing that I've witnessed over the.
Speaker 4: Past few seasons.
Speaker 2: I mean, if this is one of those proved me
Speaker 2: wrongs right on Reddit, has there been a series that
Speaker 2: has really good writing?
Speaker 4: Millions of them like, no, what like what recently? Os
Speaker 4: are true?
Speaker 2: I agree Yellowstone, No, Yellowstone, definitely not Yellowstone.
Speaker 1: I'll stick by that's the most popular show on television
Speaker 1: as well dressed.
Speaker 4: But I don't like the ways way it's written.
Speaker 2: I feel like I feel like a lot of these
Speaker 2: programs are just pitched and then have horrible writing.
Speaker 10: There are two totally different models. There's the HBO Apple
Speaker 10: model on one side, which is a handful of concentrated bets,
Speaker 10: and then there's the Netflix. Let's throw a million things
Speaker 10: up against the wall and see what sticks. Very different
Speaker 10: things like Ted Lasso or The Morning Show or or
Speaker 10: White Lotus is a very different group of writers. Then hey,
Speaker 10: let's just try a whole mon. I mean, who would
Speaker 10: have predicted in advance that Formula one Drive to Survive
Speaker 10: was going to be a mega hit that just took off.
Speaker 10: It can't believe it, right, and yet it's endlessly fascinated,
Speaker 10: fascinating not just for F one fans, but it's become like.
Speaker 2: A fascinating to people who aren't F one fans, right,
Speaker 2: because I don't both I know people who are one
Speaker 2: sopot graification of F one or Moto GP. I like
Speaker 2: both of them just find the way they are.
Speaker 10: You know, well, a lot of people disagree with you
Speaker 10: when they're watched the watching that show and droves.
Speaker 1: Hey, Githa, what does this mean for the media company's
Speaker 1: p and L here? I mean, on the one hand,
Speaker 1: I mean, I know you've got a NOTEUBT saying, hey,
Speaker 1: it's not that big a deal, but at some point
Speaker 1: couldn't be a big deal if this goes on for
Speaker 1: a while and maybe movies and stuff like that and
Speaker 1: gets halted or delayed.
Speaker 11: Yes, I think what's going to happen is so remember
Speaker 11: we're again, as I just said, we're in a very
Speaker 11: different place right now. The industry, of course, hasn't suffered
Speaker 11: workstoppage in a long time. But I think what we've
Speaker 11: generally seen is is Hollywood studios have kind of predicted this,
Speaker 11: and so they've gone ahead and they've kind of stockpile
Speaker 11: script So that's number one. Number two is I think
Speaker 11: they are looking at the possibility of exploring new genres.
Speaker 11: So you know, you don't have access to scripted content,
Speaker 11: But that's okay because reality content is now really becoming
Speaker 11: a bigger and bigger part of the programming of a
Speaker 11: lot of these streaming platforms as well as you know,
Speaker 11: the television networks. So you know, if you look at
Speaker 11: even Netflix's recent shows, whether it's you know, Love is
Speaker 11: Blind or so many of these other reality focused shows,
Speaker 11: they obviously can pivot to that, which is not only
Speaker 11: give them a steady stream of programming, but it's also
Speaker 11: much more economical for them to produce. And then again,
Speaker 11: if you look at Netflix's strategy, and this is where
Speaker 11: I think they have an edgeob over so many of
Speaker 11: the other streamers, is that they just don't rely on Hollywood,
Speaker 11: right They have gone global and so so many of
Speaker 11: their programming titles come from so many different regions in
Speaker 11: the world, and so we're not necessarily going to see
Speaker 11: a big stoppage in terms of you know, new programming
Speaker 11: because they have access to it or they have you know,
Speaker 11: source material comes from so many other different places. So
Speaker 11: I think on the whole, what we're going to see is,
Speaker 11: you know, if you look at how Wall Street is
Speaker 11: assessing media companies right now, profitability is front and center,
Speaker 11: and if you know, in fact we are going to
Speaker 11: see some stoppage of shows, I think what is going
Speaker 11: to happen, especially in the second half of this year,
Speaker 11: if it results in fewer shows being delivered, I think
Speaker 11: we're actually going to see better profitability metrics and so
Speaker 11: ironically it might be better in fact for their bottom lines.
Speaker 4: Does Netflix always sell.
Speaker 2: It's streaming service alone? Does HBO always sell its streaming
Speaker 2: service alone? Does Disney always sell at streaming service alone?
Speaker 2: Or will we get to back to a cable model
Speaker 2: where you know, I can buy a bundle of everything
Speaker 2: for eighty dollars a month.
Speaker 11: Yeah, I think, you know, we're definitely heading in that direction.
Speaker 11: I think ultimately what we're going to see is a
Speaker 11: big tech giant, whether it's an Apple or an Amazon
Speaker 11: or a Google, kind of come up with that new bundle,
Speaker 11: and so I think they are going to be the
Speaker 11: aggregators where we're definitely heading to that, you know, very soon.
Speaker 11: I don't know exactly when it happens, but but you know,
Speaker 11: I think in the next couple of years, you know,
Speaker 11: that is going to be the replacement for the old
Speaker 11: PATV bundle.
Speaker 1: Hey KEITHA. Jerry Smith Bloomberg News had an interesting article
Speaker 1: yesterday talking about Disney and ESPN and when do they
Speaker 1: really go all in on ESPN Plus and put the
Speaker 1: top flight programming on there. When do you think that
Speaker 1: that happens, Because they've been migrating some more and more
Speaker 1: program but if you want the NFL, if you want
Speaker 1: the end, you know, you got to stick with the
Speaker 1: linear network.
Speaker 11: Yeah, that's a really important question, and I think, you know,
Speaker 11: this is what everybody has been kind of scratching their head.
Speaker 11: When do they make that big pivot with ESPN And
Speaker 11: Bob Aiger is back, I think he's he's kind of
Speaker 11: just waiting it out. So for the very first time
Speaker 11: in the company's history, they're actually disclosing ESPN Financials as
Speaker 11: a standalone unit, and so I think, you know, this
Speaker 11: kind of paves the way for them to maybe separate
Speaker 11: it out, maybe, you know, make this big, bigger pivot
Speaker 11: into ESPN Plus. Obviously they do have all the market programming.
Speaker 11: We do have NFL content on the TV broadcast networks
Speaker 11: for at least another five years. But I think they're
Speaker 11: very slowly going to try and shift the content, especially
Speaker 11: when we have a new NBA contract coming up in
Speaker 11: the next two years. So I'm thinking over the next
Speaker 11: two years, you know, we will see kind of that
Speaker 11: bigger shift into an ESPN plus mainstream DTC service.
Speaker 10: So so githa quick last question from me. You know,
Speaker 10: when we had the last strike fifteen years ago, a
Speaker 10: scripted sitcoms and other sorts of shows, we're huge today,
Speaker 10: it's a much smaller purpose of the world. What do
Speaker 10: we see the costs of this if it goes on
Speaker 10: more than a few days or weeks.
Speaker 2: I'm gonna put a pin in this right here and
Speaker 2: make that question a comment because you see the red
Speaker 2: clock up there right. We only have twenty seconds left
Speaker 2: until a herd break, so you can't lob any questions
Speaker 2: in after just run in a minute.
Speaker 1: This is pot This is the kettle black right here.
Speaker 1: But Keitha, we'll get back to that one. You know Ranganathan,
Speaker 1: she's a media analyst for Bloomberg Intelligence, and it's a
Speaker 1: nice soft out so we can kind of be a
Speaker 1: little scoresh here.
Speaker 6: You're listening to the tape Can's are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business app.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Simona Mukuda joins us. She's the chief economist at State Street. Simona,
Speaker 1: you know, i'd love to get we're gonna hear from
Speaker 1: the Fed tomorrow. What do you think they will do?
Speaker 4: And what do you think they should do?
Speaker 12: Yeah?
Speaker 13: I wish those two things were had the same answer. Unfortunately,
Speaker 13: I think they will hike again, but I do not
Speaker 13: believe they should. I think, you know, for a few weeks,
Speaker 13: we may have thought that the stories about SVB and
Speaker 13: signature were away from the headlines, but those stories are
Speaker 13: very much in the economy and those effects are playing out.
Speaker 13: I think the FAT has done enough, but unfortunately I
Speaker 13: think they will will go again.
Speaker 1: So the issue for me is, I mean, you know,
Speaker 1: the real risk is pushing this economy into a recession.
Speaker 1: Is that is that in in your wheelhouse? Is that
Speaker 1: something you guys are looking for?
Speaker 11: Uh?
Speaker 13: Yeah, I think with any additional incremental tightening right now,
Speaker 13: you're doing more to worsen the growth outlook than I
Speaker 13: think you're doing two. In terms of winning the inflation battle,
Speaker 13: that battle on inflation is being one, and I know
Speaker 13: that there are many indicators that don't show victory yet,
Speaker 13: But inflation is a very lagging indicator. And I think
Speaker 13: right now anybody who's watching the economy is to has
Speaker 13: a decision to make. You know, what do you believe
Speaker 13: is telling you more about the future versus about the past.
Speaker 13: And from where I see it, everything that I consider
Speaker 13: to be leading indicators says two things, slow down and
Speaker 13: this inflation. And it's just a matter of how intense
Speaker 13: these two forces become.
Speaker 2: I mean, the concern I think for this FED is
Speaker 2: that Arthur Burns thought he had beaten inflation a couple
Speaker 2: times as well.
Speaker 5: Right.
Speaker 2: And even if you think that inflation, I don't know,
Speaker 2: isn't going back up, You probably don't think it's headed
Speaker 2: to two, do you, Simona, Because yes, it's not ten percent,
Speaker 2: but we're not. It doesn't look like we're gonna be
Speaker 2: going down to two. You were three percent anytime soon.
Speaker 2: It's pretty sticky, at least from the from what we
Speaker 2: hear the people we talk to.
Speaker 4: They use the word sticky quite a lot.
Speaker 13: Yeah, I think, well, first of all, I think the
Speaker 13: question is to be asked in the context of what horizon.
Speaker 5: Right.
Speaker 13: I think even by the end of this year, we
Speaker 13: could be looking at three percent headline inflation, and for
Speaker 13: twenty twenty four, I don't think you you know, we
Speaker 13: could be very close to two percent, but a little
Speaker 13: you know, once inflation has gone so high, I make
Speaker 13: a you know, I think of it a little bit
Speaker 13: like gaining weight. You gained the weight, when you take
Speaker 13: it off, It's not going to happen overnight. And if
Speaker 13: you try to accelerate that process, you can cause a
Speaker 13: lot of you know, unnecessary damage in the process. So
Speaker 13: I think slow, we steady. The inflation fight is actually
Speaker 13: being one. I don't necessarily think that next month you're
Speaker 13: going to see a lot of improvement, but I think
Speaker 13: in June you will, may and Junior will and then
Speaker 13: continue to see further improvement through the end of the year. So,
Speaker 13: you know, you talked about the idea that you know,
Speaker 13: you may think you win, you've won, but perhaps you haven't.
Speaker 13: But I think the FED is at five percent, right,
Speaker 13: I think there is no doubt now in the light
Speaker 13: of everything that's transparent. That's that's tight.
Speaker 1: Right, all right, Hey, Simona, thank you so much for
Speaker 1: joining us. I really appreciate getting your thoughts. As always,
Speaker 1: Simona Mokuda, Chief Economists for State streets.
Speaker 6: You're listening to the tape cans are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com, and.
Speaker 5: The Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 4: We have a couple of very smart people in the
Speaker 4: studio with us right now.
Speaker 1: Thankfully, Yep got Herman Chen who covers the banks for
Speaker 1: Bloomberg Intelligence, as well as Ridka Gupta and Ridka Good.
Speaker 4: Are you writing for m every day?
Speaker 1: Now? I'm live during for an embed.
Speaker 2: Okay, so you can see her work if you type
Speaker 2: nl ivy go on your Bloomberg trug right. And of
Speaker 2: course Herman. You know and love Herman already. He's a
Speaker 2: household name.
Speaker 1: So Herman. I've been very careful here up to this point,
Speaker 1: not calling it a bank crisis but bank turmoil. I
Speaker 1: just flipped this. I ripped up the script, as Tom
Speaker 1: Kin would say today after I think I'm flipping today
Speaker 1: and I'm calling it a crisis. What do you think?
Speaker 14: Yeah? With SVB with signature with First Republic you can
Speaker 14: make the case that these were very idiosyncratic issues where
Speaker 14: these banks grew too fast during the pandemic period and
Speaker 14: put on some risk that they really underappreciated. But now
Speaker 14: with the stocks reacting like they have today across the board,
Speaker 14: with some other regionals that shouldn't necessarily be painted in
Speaker 14: the same brush, you can make the case that you
Speaker 14: could make the case that maybe it is more of
Speaker 14: a crisis then in an idiosyncratic issue.
Speaker 4: All right, so let's talk about the problem.
Speaker 2: Was the rates mismatch or the maturities mismatch? Right that
Speaker 2: at SVB, and it was a similar problem at first
Speaker 2: Republic Signature may have just been singled out by regulators
Speaker 2: because they hate crypto, right, but at least if you
Speaker 2: listen to Barney Frank. But when I look at the
Speaker 2: big losers today, PacWest is down twenty six percent, Western
Speaker 2: Alliance is down twenty one percent, Metropolitan is down nineteen percent.
Speaker 2: Are these banks that you have looked at in your
Speaker 2: research and said, WHOA, they have way too big holds
Speaker 2: maturity portfolios, or well they've been giving out super cheap
Speaker 2: mortgages to really rich people.
Speaker 4: I mean, do they have any of those same problems.
Speaker 14: No, the issue with Peck West and with Western Alliances
Speaker 14: they get painted in the same brush SSVB because they
Speaker 14: also bank tech companies and startups. With Metropolitan Bank, it's
Speaker 14: the crypto issue with all signature. So the market saying
Speaker 14: they had a victory, the shorts had a victory with
Speaker 14: some of these other banks that already failed, and now
Speaker 14: they're playing the same playbook again with banks that are
Speaker 14: tangential to the failed banks.
Speaker 1: All Right, Herman Chan, thank you so much. We appreciate
Speaker 1: it because that boy, I'm looking to P and C
Speaker 1: Bank talk about a high quality regional down twenty five
Speaker 1: percent year to date, and even your former bank, Herman
Speaker 1: M and T Bank down you know, about twenty percent,
Speaker 1: another high quality bank. So it's really starting to spread there.
Speaker 2: Well, if they get hit hard just by shorts that
Speaker 2: are playing a game, isn't it a great time to
Speaker 2: go in and then buy them. I mean, do you
Speaker 2: like PNC down twenty five percent?
Speaker 5: Yeah?
Speaker 14: P and C is going to be one of the
Speaker 14: winners out of this entire crisis. They were heading into
Speaker 14: the weekend, they were they were the horse to jockey
Speaker 14: on in terms of buying First Republic. They didn't get
Speaker 14: that deal done. But if we see other failed banks,
Speaker 14: you would think P and C would be the first
Speaker 14: call from the regulators to clean up some of the
Speaker 14: messes that we're seeing.
Speaker 1: All right, we'll keep an eye on up, you know,
Speaker 1: kind kind of selling across the board. Herman Chen, he
Speaker 1: covers the regional banks for Bloomberg Intelligence Ritka Group that
Speaker 1: covers all the markets for us. She joins us here
Speaker 1: in a Bloomberg Interactor broker studio.
Speaker 6: You're listening to the tape Ken's our live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com.
Speaker 5: And the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 1: All right, looking at this market here today again, a
Speaker 1: rough day of trading. The s and P off one
Speaker 1: and a half percent. We are off the lows, but
Speaker 1: still trading down on some pretty solid volume. Nastak off
Speaker 1: one and a quarter percent. You know, a lot of
Speaker 1: cross currents out there. We have the feder reserve tomorrow
Speaker 1: that'll be the big driver. But of course, today we
Speaker 1: had some renewed weakness in some of the regional banks,
Speaker 1: and that's kind of where we want to go just
Speaker 1: talking about this banking sector in the relative health of
Speaker 1: the US and global banking space. No one better to
Speaker 1: chat about that than Hugh van steinis vice chair and
Speaker 1: partner at Oliver Wyman. He has been involved in the
Speaker 1: global banking business for decades and we appreciate getting some
Speaker 1: of his time. He is out in la at the
Speaker 1: Milken Conference, so I appreciate a few minutes of his time,
Speaker 1: So love huge. Just to get your thoughts. We had,
Speaker 1: you know, renewed concern today in the stock market about
Speaker 1: some of the US regional banks.
Speaker 5: What's your take?
Speaker 12: Oh well, thanks for having me on. Well, look all
Speaker 12: the conversations about having here, are you know, is the
Speaker 12: regional banking turmoil contained or is there another shoe to drop?
Speaker 12: And then obviously you know, what does it mean from here?
Speaker 12: I think the big challenges that you know, war buffersically
Speaker 12: said depositors won't lose money, but bondholders at First Republic did,
Speaker 12: and so I think the key issue here is nervousness
Speaker 12: through the capital stack about who else you know, resembles
Speaker 12: the banks which have failed. But I think, you know,
Speaker 12: bottom line, for me, we're in the early innings of
Speaker 12: a credit cycle and it's the weakest hands who are struggling.
Speaker 12: And I think it's still you know, I think that
Speaker 12: the system is struggling to repriced for a very sharp
Speaker 12: increase in interest rates.
Speaker 1: Here, what do you think about yesterday's news And this
Speaker 1: kind of news is very fluid in this in this
Speaker 1: industry right now, but the news yesterday at JP Morgan
Speaker 1: buying First Republic. What was your view of that? Was
Speaker 1: that the right solution, a reasonable solution, or kind of
Speaker 1: the only solution you think?
Speaker 12: Look, I don't want to get drawn too much into single,
Speaker 12: single names, but you know, the history of every major
Speaker 12: financial crisis, you know, seventies, eighties, nineties is large, strong
Speaker 12: hands take over the weaker. And obviously, because of you know,
Speaker 12: Frank Dodd and other regulations around the world, the large
Speaker 12: banks have not really been involved in m and A
Speaker 12: for the last decade because they haven't been able to
Speaker 12: take more share. But I think history suggests it's always
Speaker 12: the strong banks who take over, and so you've seen
Speaker 12: that in Europe and the States. So I think, you know,
Speaker 12: it wouldn't surprise anyone if there's a bit more m
Speaker 12: and a to come, because that's what the history of
Speaker 12: banking crisis always suggests.
Speaker 1: The obviously we all learned, I mean just all our listeners,
Speaker 1: all our readers, all our viewers learned a lot about
Speaker 1: the banking business with a great financial crisis back in
Speaker 1: two thousand and seven, two thousand and eight. Do you
Speaker 1: feel do you share the thought that the US and
Speaker 1: we'll get to the global international market later. Do you
Speaker 1: think the US market is as strong as a lot
Speaker 1: of folks keep telling us.
Speaker 12: Oh, look, I think the banking business is in much
Speaker 12: ruder health. I mean, capitalists tripled, the largest banks are
Speaker 12: stress tested, they've got loads more funding, you know, and also,
Speaker 12: let's be honest, they're diversified. I mean, you know, what
Speaker 12: we've really seen here is quite monoligne or narrow businesses
Speaker 12: struggle through an air pocket. The largest banks are very diversified,
Speaker 12: and therefore they've got different streams of earnings coming in.
Speaker 12: So I think the system's much stronger in some ways.
Speaker 12: This is you know, you know, for those listening, is
Speaker 12: it's coming back. This is much more like the early
Speaker 12: nineteen eighties. It's a very sharp increase in interest rates,
Speaker 12: which have you know, meant that some people made some
Speaker 12: rather poor choices on carry trades or in this case,
Speaker 12: you know, we've got a lot of uninsurance positives, you've
Speaker 12: got some weak funding structures. Is much more like eighty
Speaker 12: one to eighty seven in terms of structure, and obviously
Speaker 12: that's when you know Volka had to bail out Continental
Speaker 12: Illinois eighty four. It's much more like that and that that,
Speaker 12: I mean, what the bottom line for us this market is.
Speaker 12: It's quite tough because it means financial conditions really tightened
Speaker 12: very sharply, and there's a lot more volatility for companies
Speaker 12: and corporates to deal with.
Speaker 1: There's obviously, is I guess to be expected some public
Speaker 1: outcry that there needs to be more regulation perhaps on
Speaker 1: some of these smaller, mid sized regional banks, not just
Speaker 1: the big money centers. What's your view there?
Speaker 12: Oh, look, I mean I think it's Look, so there's
Speaker 12: a great line from a book in the nineteen eighty
Speaker 12: saying that there were three things which led to the
Speaker 12: banking crisis. It's like deregulation, d supervision, and they're not
Speaker 12: dealing with that, you know, decriminalization, of fraud. I think
Speaker 12: this is it's all three have come through the same
Speaker 12: here as well. Of course for the small for the
Speaker 12: MidCap banks who got deregulated, a bit more capital would help.
Speaker 12: As you can tell, I'm European and europe a systemic
Speaker 12: bank is from fifty billion of our WA's obviously it's
Speaker 12: it's been a quarter for a trillion over here since
Speaker 12: the deregulation, so that will need to be reassessed as
Speaker 12: the FED proposals are putting through. But it was also
Speaker 12: a failure of supervision, and I think you know what
Speaker 12: my read of the FED report from last Friday was
Speaker 12: that there were many red and Amber flags which were ignored.
Speaker 12: So this is as much about supervisory practice as as
Speaker 12: about the REGs themselves. And then the other point, what's
Speaker 12: in every crisis is different in flavor. You know, money
Speaker 12: market funds are being subsidized by the FED, which is
Speaker 12: very different from the financial crisis. Forty percent of all
Speaker 12: money market funds are being parked at the FED overnight,
Speaker 12: and the FED is therefore subsidizing the disintermediation of the
Speaker 12: banking system. That has to be looked at as well.
Speaker 1: There's a real economic concern here and maybe we'll hear
Speaker 1: from Fred Trriman J Powell comment on this tomorrow. But
Speaker 1: you know, fed condition, I mean, credit conditions are tightening.
Speaker 1: Do you do you fear that they were tightened to
Speaker 1: such a degree that would have a real negative impact
Speaker 1: on the economy.
Speaker 12: I think so. Look, you know, look, if it was
Speaker 12: just the banking crisis, you know, to have you know,
Speaker 12: such a it's for me, this is equivalent of a
Speaker 12: like a one to one and a half point increase
Speaker 12: in interest rates. It's a very sharp, uh, you know,
Speaker 12: punching the gut for the MidCap banks in terms of
Speaker 12: funding structures, and also for the larger banks. They're getting
Speaker 12: nervous because either they'll have to be acquiring the MidCap
Speaker 12: banks or they'll also start to fret about their own business.
Speaker 12: So it's a very sharp increase. Now, look, there's still
Speaker 12: savings from the pandemic, there's there's other good reasons why
Speaker 12: businesses can prosper. But the tightening of funding conturaled conditions means,
Speaker 12: you know, I do think we slip into recession into
Speaker 12: you know, whether it's the fourth quarter or someone. So no,
Speaker 12: I think I think it's tough. Look, bottom line, we're
Speaker 12: in the early innings of a credit cycle, and you know,
Speaker 12: I think that's the challenges where does this go is well,
Speaker 12: you know, the number one conversation I'm having here at.
Speaker 1: MILCNE and I'm sure you're also been asked to your
Speaker 1: opinion on European banking. We you know, we just had
Speaker 1: the UBS credit Swiss situation go down. I'd love to
Speaker 1: get your thoughts on kind of how you view the
Speaker 1: banking landscape across Europe.
Speaker 12: Well, look, there's you know, so look, I think there's
Speaker 12: two key differences. So the first is we didn't have
Speaker 12: this wave of deregulation. You know, the every major bank
Speaker 12: in Europe has got a capital stack, a stress testing
Speaker 12: and funding so they can withstand you know, a huge
Speaker 12: panic and therefore, you know, and most of them have
Speaker 12: got a lot of insured deposits. I mean, you know,
Speaker 12: one of the banks which failed, like the US banks,
Speaker 12: had a lot of uninsured deposits, which is quite rare.
Speaker 12: But the second, which you know, you you know from
Speaker 12: from the fact how well the US has done over
Speaker 12: the last decade. The QI led to huge credit expansion
Speaker 12: in the States, you know, and some real excesses in Europe.
Speaker 12: We didn't have those excesses, and so there's you know,
Speaker 12: we're not really going from boom to bus because we
Speaker 12: never really had that boom. So I think again, you know,
Speaker 12: you know what was disappointing for Europe in the last
Speaker 12: decade is probably a source of strength now at the moment.
Speaker 1: Here, we got about thirty seconds left, i'd love to
Speaker 1: get your thoughts on the need for cross border bank
Speaker 1: m and A in Europe. A lot of times when
Speaker 1: we see some stress out there, whether it's Deutsche Bank
Speaker 1: or Credit Swiss, I kind of hear that discussion pick
Speaker 1: up some steam.
Speaker 12: What do you think, Look, it's it's possible. Look in
Speaker 12: a crisis, Look, we all turned to home and so
Speaker 12: it's much more likely it's national champions and domestic solutions
Speaker 12: if there are any needs to be done. But you know, look,
Speaker 12: I think we see Europe needs more strong global banks,
Speaker 12: and so it would be it would be helpful, but
Speaker 12: I'm not expecting any soon.
Speaker 1: All right, Hugh, thank you so much for joining us.
Speaker 1: Really appreciate you taking a few minutes out of your time.
Speaker 1: You know you're busy out there at the Milken Conference
Speaker 1: in Los Angeles. That's Hugh Van Steeney's vice chair and
Speaker 1: partner in Oliver Wyman, and before that he was a
Speaker 1: senior advisor to the CEO at UBS, senior advisor to
Speaker 1: the Governor of the Bank of England. He was on
Speaker 1: Wall Street and Morgan Stanley and JP Morgan covering all
Speaker 1: the banks from a global perspective. So we love what
Speaker 1: we could get a couple of minutes of his time
Speaker 1: to talk about, you know what it is the issue
Speaker 1: certainly of today, but really over the last month. Some
Speaker 1: of the question is when you think about bank stress,
Speaker 1: how much will this be an impact on the economy?
Speaker 1: How much will the Federal Reserve factor that into their
Speaker 1: calculus when we hear from them tomorrow. So great to
Speaker 1: check in with you there.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm fall Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio.